Smallholder Palm Oil Financing in Indonesia - Needs and Opportunities for Sustainable Finance Intervention - Rainforest ...
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Smallholder Palm Oil Financing in Indonesia Needs and Opportunities for Sustainable Finance Intervention January 2016
Smallholder*Palm*Oil*Financing*in*Indonesia:*
Needs%&%Opportunities%for%Sustainable%Finance%Intervention!
!
Executive)Summary
Over!the!summer!of!2015,!the!Rainforest!Alliance! shows!annual!costs!between!$113!and!$151!per!
researched!palm!oil!financing!in!Indonesia!with!the! hectare!for!oil!palm!tree!maintenance!using!BMPs.!!
objective!to!better!understand!the!financing!needs!
GERMPLASM)RENOVATION.))
of!smallholder!palm!oil!producers!and!to!identify!
An)estimated)10)percent)of)smallholder)palm)oil)
opportunities!for!supporting!these!producers!in!
producers)need)to)renovate)their)farms)entirely)to)
accessing!shortAterm!and!longAterm!financing.!!
increase)their)production)and)improve)the)quality)
The!primary!objectives!in!undertaking!this!research! of)the)fresh)fruit)bunches)(FFB).!Our!preliminary!
are:!! cost!analysis!shows!an!investment!need!of!up!to!
$777!per!hectare!over!the!first!5!years!of!a!
1. To!better!inform!the!Rainforest!Alliance!
plantation!mainly!to!pay!for!good!quality!seedlings!
technical!assistance!packages!for!smallholder!
and!inputs!such!as!fertilizers.!
palm!oil!producers!in!Indonesia;!
PROCESSING.))
2. To!engage!with!stakeholders!and!financiers!on!
In)some)instances,)producers)could)capture)
financing!opportunities!in!the!smallholder!palm!
additional)value)from)palm)oil,)if)given)the)
oil!sector;!
opportunity)to)process)their)own)FFB)into)crude)
3. To!facilitate!smallholder!palm!oil!producers’! palm)oil)(CPO)!with)smallPscale)mills.!When!large!
access!to!financing!for!palm!oil!renovation,! mills!are!unavailable!or!difficult!to!access,!
quality!and!productivity!increases,!and!livelihood! smallholderAowned!smallAscale!mills!can!fill!local!
improvements.! infrastructural!gaps.!However,!this!requires!
investment!in!infrastructure!($90,000A!$280,000!
Throughout!our!research!we!identified!the!following!
depending!on!the!mill!size)!and!in!building!mill!
key!needs!and!opportunities!for!sustainable!
financing!interventions!in!the!Indonesian! management!capacity.!!
smallholder!palm!oil!sector:!! Supporting!smallholder!palm!oil!producers!through!
BEST)MANAGEMENT)PRACTICES.)) these!three!approaches!in!combination!with!linking!
them!to!financing!will!ultimately!lead!to!productivity,!
Smallholder)palm)oil)producers)can)significantly)
yield,!and!income!improvements!while!promoting!
improve)the)quantity)and)quality)of)their)
production)by)implementing)best)management) sustainable!palm!oil!production!and!livelihood!
improvements.!!
practices)(BMPs).)Our!preliminary!cost!analysis!
!
!Contents)
)
Executive!Summary!..............................................................................................................................................!1!
I.! Introduction!.................................................................................................................................................!3!
II.! Objectives!and!Methodology!.......................................................................................................................!3!
a.# Objectives#...............................................................................................................................................#3#
b.# Methodology#..........................................................................................................................................#4#
III.! Palm!Oil!in!Indonesia:!A!Controversial!yet!Important!and!Complex!Sector!................................................!4!
a.# Indonesia’s#Top#Commodity#....................................................................................................................#4#
b.# A#Complex#Value#Chain#...........................................................................................................................#5#
c.# An#Industry#under#Scrutiny#.....................................................................................................................#6#
IV.# Production#Challenges#in#Smallholder#Palm#Oil#Farming#.............................................................................#7#
a.# High#upIfront#costs#for#plantation#establishment#causes#underinvestment#in#future#farm#productivity#7#
b.# Poor#understanding#of#BMPs#results#in#low#FFB#productivity#of#oil#palm#trees#......................................#7#
c.# Lack#of#usage#of#highIquality#seedlings#leads#to#low#quality#and#yield#of#CPO#.......................................#8#
d.# Dependency#on#external#processing#capacity#develops#unfair#relationships#within#the#supply#chain#....#8#
V.! Opportunities!for!Sustainable!Smallholder!Palm!Oil!Production!................................................................!9!
a.# Implementing#Good#Agricultural#Practices#and#Appropriate#Technologies#............................................#9#
b.# Implementing#germplasm#renovation#..................................................................................................#10#
c.# Capturing#added#value#through#smallholder#processing#......................................................................#11#
d.# Improving#access#to#smallholder#financing#...........................................................................................#12#
VI.! Cost!Structure!Analysis!..............................................................................................................................!13!
a.# Financing#is#required#for#seedlings#and#fertilizers:#the#main#cost#drivers#implementing#BMPs#on#a#new#
plantation.#.................................................................................................................................................#14#
b.# Bridging#the#financing#gap#to#catalyze#BMP#implementation#..............................................................#15#
VII.! Next!Steps!..................................................................................................................................................!16!
Contact!&!Information!.......................................................................................................................................!16!
Acknowledgment!...............................................................................................................................................!16!
References!.........................................................................................................................................................!17!
!
!
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!financing!interventions,!whether!it!be!through!
I. Introduction) financial!literacy!training!programs,!where!
The!Rainforest!Alliance!is!concerned!about!the! producers!would!be!taught!best!record!keeping!or!
destructive!impact!of!expanding!oil!palm!plantations! debt!management!practices;!or!through!the!
on!the!rainforests,!particularly!in!countries!like! implementation!of!access!to!financing!or!credit!
Indonesia,!where!these!plantations!are!one!of!the! programs!in!partnership!with!local!financial!
major!drivers!of!deforestation.! institutions!and!investors.!In!the!summer!of!2015,!
the!Rainforest!Alliance’s!Sustainable!Finance!team!
In!addition!to!supporting!the!efforts!of!the! undertook!a!comprehensive!desk!research!project!
Roundtable!on!Sustainable!Palm!Oil!(RSPO),!the! on!palm!oil!smallholder!finance!in!Indonesia!in!order!
Rainforest!Alliance!has!created!its!own!rigorous,! to!better!inform!its!technical!assistance!packages,!
complementary!certification!system!for!oil!palm! design!its!sustainable!finance!interventions!and!
plantations,!based!on!the!Sustainable!Agriculture! engage!with!local!stakeholders!and!financiers.!!
Network!(SAN)!standard!that!puts!additional!
emphasis!on!biodiversity!and!forest!conservation.!! This!report!summarizes!the!main!findings!and!
Rainforest!Alliance!certification!is!a!powerful!tool!to! takeaways!of!this!desktop!research!and!lays!out!
address!the!urgent!environmental!and!social! next!steps!for!developing!and!implementing!
problems!posed!by!the!expansion!of!oil!palm! sustainable!finance!interventions!for!smallholder!
plantations—including!the!displacement!of! palmAoil!producers!in!Indonesia.!Section!II!
indigenous!peoples,!competition!between!large! recapitulates!the!objectives!and!the!methodology!
agribusinesses,!and!local!farmers!for!water!and! underlying!this!research!paper.!!Sections!III,!IV,!and!
basic!resources,!and!the!impact!of!mass!production! V!provide!an!overview!of!the!palm!oil!sector!in!
on!food!prices!and!security.!! Indonesia!and!the!challenges!and!opportunities!
faced!by!smallholder!producers!in!moving!toward!
Because!the!SAN!standard!works!across!a!wide! sustainable!palm!oil!production.!Section!VI!
range!of!agroAecosystems!and!crops,!it!has!to! highlights!findings!from!the!cost!structure!analysis!
remain!flexible!and!aimed!at!contextual!problemA conducted!by!the!Rainforest!Alliance.!Finally,!
solving.!!As!the!Rainforest!Alliance!has!begun!to! Section!VII!provides!insight!on!next!steps!for!
work!with!palm!oil!producers!of!all!scales,!it!has! continuing!this!work.!!
begun!to!explore!solutions!for!issues!unique!to!the!
development!and!production!of!this!crop.The!focus! II. Objectives)and)Methodology)
on!this!paper,!smallholder!finance,!is!but!one!
example!of!the!multiple!efforts!the!Rainforest! a. Objectives)
Alliance!has!begun!in!support!of!developing!!SANA The!primary!objectives!for!the!Rainforest!Alliance!in!
based!responses!to!the!unique!challenges!of!palm! undertaking!this!study!are:!
oil!production.!
1. To!better!understand!the!capacityAbuilding!
Beyond!certification,!the!Rainforest!Alliance!is!also! needs!of!smallholder!palmAoil!producers!in!
implementing!capacityAbuilding!programs!with!palm! Indonesia!and!inform!the!development!of!
oil!companies!in!Indonesia!and!other!countries!to! appropriate!technical!assistance!packages,!
support!smallholder!palm!oil!producers!with!the! including!training!on!best!agricultural!practices,!
adoption!of!BMPs.!For!example,!the!Rainforest! farm!renovation,!climate!adaptation,!financial!
Alliance!is!now!working!to!help!smallholders!achieve! literacy,!business!management,!and!access!to!
SAN!certification!in!both!Indonesia!and!Papua!New! financing;!
Guinea!by!both!addressing!gaps!in!practices!with!the!
SAN!standard!and!using!these!opportunities!for! 2. To!understand!the!financial!needs!and!capacity!
shared!learning!and!problem!solving!on!scales!and! of!smallholders!palmAoil!producers!!and!to!
technologies!appropriate!for!these!producers.! engage!with!industry!stakeholders!as!well!as!
investors,!social!lenders,!and!financial!
As!part!of!its!service!offering,!the!Rainforest!Alliance! institutions!on!financing!opportunities!and!
is!also!exploring!opportunities!to!support! challenges!in!the!smallholder!palm!oil!sector;!
smallholder!palmAoil!producers!with!sustainable!
3!|!P a g e !
!3. To!facilitate!financial!innovation!and!–!when!
appropriate—smallholder!palm!oil!producers!
access!to!financing!for!palm!oil!renovation,!
quality!and!productivity!increases,!and!
livelihood!improvements.!
Guided!by!these!objectives,!this!study!aimed!to!
answer!the!following!three!questions!related!to!
independent!smallholder!palmAoil!production!in!
Indonesia:!
1. What!are!the!main!challenges!and!opportunities!
!
for!smallholder!palm!oil!producers!in!Indonesia?!! Figure)1:!Palm!Oil!Production!in!Indonesia.!(Rianto,#2010)!
As!of!2007,!Indonesia!has!surpassed!Malaysia!as!the!
2. What!are!the!investments!required!and!key! world’s!largest!palm!oil!producer!(USDA!Foreign!
financing!needs!for!smallholder!producers!to! Agricultural!Service,!2007),!thanks!to!its!ideal!
grow!sustainable!palm!oil!in!Indonesia?!! growing!conditions,!abundant!land,!and!cheap!labor!
3. What!are!the!next!steps!for!the!Rainforest! (IFC,!2013).!The!country!now!produces!an!average!
Alliance!to!develop!its!technical!assistance! 28.5!million!tons!of!palm!oil!per!year—which!
package!in!Indonesia!and!to!foster!smallholder! amounts!to!more!than!50!percent!of!the!world’s!
palm!oil!producers’!access!to!the!financing!they! supply!(AidEnvironment,!2014).!Its!total!production!
need!to!grow!sustainable!palm!oil!and!improve! has!tripled1!since!2005,!growing!at!an!annual!rate!of!
their!livelihood?! 6.7!percent2!(AidEnvironment,!2014).!!
b. Methodology) Palm!oil!is!one!of!Indonesia’s!main!commodities,!
topped!only!by!coal!and!petroleum!(UN!Comtrade,!
The!study!consisted!of!three!phases!of!research:!! 2015).!The!crop!alone!generates!6!to!7!percent!of!
• A!literature!review!of!44!publications!from! Indonesia’s!GDP3!(Roundtable!on!Sustainable!Palm!
research!institutes,!technical!assistance! Oil,!2011)!and!is!its!most!significant!export!crop,!
providers,!consulting!companies,!and!industry! accounting!for!8.3!percent!of!Indonesia’s!total!
parties!operating!in!Indonesia.! exports4!(Observatory!of!Economic!Complexity,!
2015).!!
• Interviews!with!11!organizations!from!the!palm!
oil!sector!in!Indonesia!(see!acknowledgments).!! The!palm!oil!industry!also!mobilizes!a!substantial!
portion!of!the!Indonesian!labor!force!and!involve!an!
• Financial!modeling!and!economic!and!costA estimated!3.7!million!people!!(Roundtable!on!
benefit!analysis!based!on!data!collected!through! Sustainable!Palm!Oil,!2011),!including!1.4!million5!
the!literature!review!and!expert!interviews.!! smallholder!producers!who!each!cultivate!less!than!
three!hectares!of!land!(AidEnvironment,!2015).!
III. Palm)Oil)in)Indonesia:)A) Indonesia’s!smallholder!oil!palm!farmers!represent!
Controversial)yet)Important)and) 7.5!percent!of!the!labor!force!in!Indonesia’s!
agriculture!sector!(Schuster!Institute!for!
Complex)Sector)
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!! !
1
a. Indonesia’s)Top)Commodity) !In!2005!Indonesia!produced!10!million!tons!
(AidEnvironment,!2014)!
Oil!palms!are!grown!in!the!world’s!major!tropical! 2
!Average!annual!growth!2010A2013;!based!on!ISTA!Mielke!
rainforests!along!the!equator!(Poku,!2002).! GmbH!(2013).!Forecasts!for!2013.!
Originally!a!West!African!crop,!oil!palm!was!first! 3
!Based!on!GDP!in!2010.!
introduced!to!Indonesia’s!Sumatra!region!by!the! 4
!Based!on!a!total!export!value!of!$17.617!million!
Dutch!in!the!colonialAera!1850s!(Setiadi,!2015).!
(AidEnvironment,!2015).!
Sumatra!now!accounts!for!65!percent!of!Indonesia’s! 5
!AidEnvironment!et!al.!2013,!calculation!using!total!area!
palm!oil!production!(Rianto,!2010)!(see!Figure!1).! managed!by!smallholders!and!average!size!of!their!
plantations.!
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!Investigative!Journalism!at!Brandeis!University,! Though!plasma!scheme!setAups!may!vary,!plasma!
2014)6.! scheme!smallholders!usually!receive!land!(or!have!
their!own!land!developed!by!the!company),!
b. A)Complex)Value)Chain) technical!support,!and!financing!for!agronomic!
Indonesia’s!palm!oil!industry!is!dominated!by!large! inputs!in!return!for!the!obligation!to!sell!their!
and!often!vertically!integrated!plantation!companies! harvested!fresh!fruit!bunches!(FFB)!to!the!company!
that!manage!58!percent!of!Indonesia’s!oil!palm! mill!at!a!discounted!price.!!
plantation!area!(AidEnvironment,!2015).!However,! On!the!other!hand,!independent!smallholder!
Indonesian!law!requires!that!plantation!companies! farmers!sell!their!FFB!to!local!traders,!who!then!
allocate!20!percent!of!their!plantation!development! deliver!the!FFB!to!local!mills!for!processing.!These!
to!smallholder!farmers!(Hanu,!2015).!In!addition!to! middlemen!have!delivery!contracts!with!local!mills!
corporate!plantations,!smallholders!also!cultivate! to!bring!in!a!preAarranged!volume!of!FFB.!!
approximately!40!percent!of!the!land!not!managed!
by!plantation!companies,!either!in!cooperation!with! Of!the!15!million!hectares!of!land!allocated!to!palm!
companies!or!independently!(AidEnvironment,! oil!cultivation!in!Indonesia,!25!percent!is!managed!
2015).!! by!smallholders!in!plasma!schemes,!and!17!percent!
by!independent!smallholders!(AidEnvironment,!
The!official!Indonesian!representation!of!a! 2015)!(See!Figure!3).!!!
smallholder!farmer!is!one!that!does!not!require!the!
acquisition!of!a!business!license!(Izin#Usaha#
Perkebunan#untuk#Budidaya!or!“IUPAB”),!which!by!
law!is!required!on!holdings!of!25!hectares!and!
above.!!Most!oil!palm!growers!with!limited!access!to!
capital!and!with!labor!limited!to!a!family!unit;!under!
these!conditions,!they!grow!oil!palms!on!much!
smaller!land!holdings.!For!the!purpose!of!this!report,!
we!consider!smallholder7!oil!palm!producers!to!be!
those!who!hold!or!cultivate!less!than!3!ha!of!oil!
palms.!!We!chose!this!unit!to!describe!smallholders! )
as!primarily!producers!without!ready!access!to!the! Figure)2:!Plantation!Ownership!in!Indonesia!(data!from!
capital!required!to!support!expanded!production.!! AidEnvironment,!2015)!
This!land!unit!represents!the!typical!production!unit!
Oil!palm!is!a!popular!cash!crop!among!smallholders!
for!a!familyAbased!labor!force,!with!larger!land!areas!
because!of!its!25!–!30!year!economic!lifespan,!
requiring!the!use!of!hired!labor.!!
relatively!low!labor!requirement,!and!substantial!
Smallholders!can!be!broadly!classified!as!either! contribution!to!rural!incomes:!the!average!net!
“independent”!or!organized!in!“plasmaIinti# income!of!oil!palm!smallholders!is!seven!times!that!
schemes”8!(where!“plasma”!refers!to!the! of!farmers!growing!subsistence!food!crops!(World!
smallholders,!and!“inti”!to!the!plantation/mill! Growth,!2011).!Its!yearlong!and!consistent!harvest!
center)!around!large!mills!operated!by!plantation! cycle!(AidEnvironment,!2014),!where!FFB!is!
companies.!! harvested!every!10!–!14!days!(IFC,!2013),!also!
attracts!smallholder!farmers!who!desire!a!consistent!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!! ! source!of!income.!
6
!Rainforest!Alliance,!estimation!using!palm!oil!labor!force! Beyond!the!extension!of!estates,!smallholder!palm!
and!total!labor!force!of!agriculture!sector.!!! oil!production!has!been!a!key!factor!in!the!
7
!The!government!of!Indonesia,!however,!qualify!as!“smallA expansion!of!the!palm!oil!industry!in!Indonesia.!
holding”!any!producer!not!required!to!get!a!business!license!
Smallholder!oil!palm!cultivation!areas!have!more!
for!the!rights!to!use!state!lands!
8
than!tripled!since!2000.!Meanwhile,!production!has!
!There!are!now!two!main!types!of!plasmaAinti!schemes!in!
increased!by!560!percent,!reaching!26.9!million!tons!
palm,!the!older!Perkebunan!Inti!Rakyat!(PIR)!and!the!newer!
Pola!Kemitraan!Melalui!Pemanfaatan!Kredit!Kepada!Koperasi! of!CPO!in!2011!(AidEnvironment,!2015).!!
Primer!untuk!Anggotanya!(KKPA).!!!
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!cosmetics,!and!biofuel!industries!(AidEnvironment,!
2014):!!its!high!productivity!per!hectare9!and!
“Smallholder”:)The!government!of!Indonesia! relatively!low!production!costs!makes!it!cheaper!
defines!any!producer!not!required!to!get!a! than!other!vegetable!oils!(Obidzinski,!Lee,!Ghazoul,!
business!license!for!the!rights!to!use!state!lands! &!Koh,!2013).!As!a!result!of!an!11.6!percent!global!
as!a!smallholder!farmer.!For!the!purpose!of!our! increase!in!population!and!a!5!percent!increase!in!
work!we!qualify!as!smallholder!a!producer! per!capita!consumption,!demand!is!expected!to!
holding!less!than!3!ha!of!land.) grow!by!an!additional!28!million!tons!by!2020!(The!
Average)FFB)produced)per)year:)13!tons/ha! World!Bank!Group,!2011),!putting!more!pressure!on!
native!forests.!!
Potential)FFB)produced)per)year:!22!tons/ha!
Biodiversity+loss+&+land+degradation+
Percentage)percent)of)national)export)value:!
8.3!percent!! Conversion!of!forest!to!oil!palm!plantations!
endangers!the!vibrant!biodiversity!supported!by!
Challenges:!Lack!of!quality!seedlings,!improper! tropical!rainforests!threatening!forestAdependent!
use!of!fertilizer,!lack!of!technical!agronomic! species!(such!as!orangutans,!tigers,!elephants,!sun!
understanding!and!financing!for!inputs;!lack!of! bears,!etc.),!plant!species!diversity!and!the!
understanding!of!pricing!policies!for!FFB!at!farm! economic!benefits!generated!from!tropical!forests!
gate!(AidEnvironment,!2015)! and!ecosystem!services!(carbon!retention!and!
Annual)Returns:!! regulation!of!water)!(Scientists,!2014)!Deforestation!
$960/ha!for!low!yield!independent! also!contributes!to!soil!erosion!and!chemical!runAoff!
$2340/ha!for!high!yield!independent!! pollution,!particularly!if!farmers!do!not!have!the!
(World!Growth,!2011)! technical!capacity!to!properly!manage!pesticides!
and!herbicides!(Anderson,!2006).!!
Figure)3:!Profile!of!Indonesian!Palm!Oil!Smallholders! ! Greenhouse+gas+emissions+
c. An)Industry)under)Scrutiny) Deforestation!due!to!the!conversion!of!peatlands!
Indonesia’s!palm!oil!industry!is!often!criticized!for!its! has!made!Indonesia!the!thirdAlargest!source!of!
negative!impact!on!the!environment,!including! greenhouse!gas!emissions!by!some!estimates!
deforestation,!biodiversity!loss,!greenhouse!gas! (World!Bank,!2007),!tailing!only!behing!the!US!and!
emissions,!and!land!degradation,!in!addition!to! China.!CarbonArich!peatland!swamps!(where!as!
cases!of!negative!social!impact!on!rural!communities! much!as!80!percent!or!more!of!the!carbon!is!held!
and!exploitive!treatment!of!smallholder!farmers.! belowAground!in!ancient!peat!and!transformational!
coal!deposits)!are!critical!to!water!regulation!and!
Deforestation+ biodiversity!preservation.!
Indonesia’s!absolute!rate!of!deforestation!is! Exploitative+treatment+of+smallholder+
considered!among!the!highest!on!the!planet! farmers+
(Gunarso,!Hartoyo,!Agus,!&!Killeen,!2013)!with!palm!
oil!production!being!one!of!the!largest!drivers!along! Finally,!the!dominance!of!oil!palm!plantation!
with!pulp!and!paper!(Greenpeace!International,! companies!and!mills!often!results!in!inequitable!
2013).!In!the!West!Kalimantan!region,!75!percent!of! benefitAsharing!with!smallholder!communities.!In!
total!deforestation!from!2009!to!2011!was! setting!up!intiAplasma!partnerships!with!
attributed!to!the!rapid!expansion!of!logging!and! communities,!palm!oil!plantation!companies!may!
palm!oil!plantations!(Greenpeace!International,! monopolize!the!most!productive!land.!When!
2013).!Between!2000!and!2012,!Indonesia!lost!more! developing!the!plasma!estates!for!smallholders,!
than!6!million!hectares!of!its!forest,!representing!6! many!palm!estates!have!been!accused!of!delaying!
percent!of!its!total!land!area:!an!area!half!the!size!of! their!implementation!while!first!prioritizing!their!
England!(World!Resources!Institute,!2014).!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!! !
This!deforestation!is!driven!by!the!growing! 9
!Palm!oil!produces!nearly!10x!as!much!oil!as!other!vegetable!
prevalence!of!palm!oil!in!the!food,!chemical,! oil!crops,!including!soya!bean,!rapeseed,!etc.!(CITATION).!
6!|!P a g e !
!own!inti!estate!plantings.!!Many!mills!and!traders! up!for!low!yields!for!the!entirety!of!their!palm!
use!nonAtransparent!pricing!formulas!to!discount! plantation’s!rotation!of!25!to!30!years.!!
prices!paid!to!farmers!for!their!FFB.!In!some!studies,!
Oil!palm!trees!typically!require!3A4!years!to!mature!
as!few!as!10!percent!of!smallholders!are!reported!to!
before!they!are!able!to!yield!fruits!and!provide!
fully!understand!the!quality!grading!and!penalty!
farmers!with!financial!returns.!This!challenges!
process!at!the!mill!(IFC,!2013).!!
smallholders!who!must!sustain!the!plantation!
A!lack!of!clarity!regarding!land!development!and! establishment!cost!and!maintain!the!farm!with!
pricing!reduces!trust!between!farmers,!!plantations,! proper!amounts!and!application!of!agronomic!
and!mills.!Since!many!smallholders!either!receive! inputs.!It!is!noteworthy!that!the!first!few!years!are!
land!from!the!plantation!companies!or!make! crucial!to!the!oil!palm’s!future!productivity.!!Use!of!
arrangements!to!allow!the!plantation!companies!to! BMPs!and!AT!may!significantly!reduce!this!nonA
develop!their!lands!in!exchange!for!a!share!in!the! income!period.!Some!studies!show!that!proper!
form!of!plasma,!this!results!in!less!cooperation!and! management!of!soil!and!weed!competition,!when!
less!smallholder!investment!in!the!longAterm! combined!with!optimum!planting!materials,!can!
productivity!of!their!farm—further!complicating!the! reduce!the!time!needed!for!production!to!
challenges!already!faced!by!smallholder!farmers.! commence!by!!at!least!a!year!,!and!more!quickly!
reach!optimum!levels!(Orrell!2015).!
IV. Production)Challenges)in)
b. Poor)understanding)of)BMPs)results)
Smallholder)Palm)Oil)Farming)
in)low)FFB)productivity)of)oil)palm)
Indonesia’s!smallholder!palm!oil!farms!suffer!from!a! trees)
selfAperpetuating!cycle!of!lack!of!financing,!
Indonesian!smallholder!farmers!overall!produce!on!
underinvestment,!low!yields,!and!low!income.!The!
average!40!percent!fewer!tons!of!FFB!per!hectare!
challenges!that!ultimately!drive!down!smallholder!
compared!to!company!plantations!(IFC,!2013).!
yield!and!income!include:!1)!high!plantation!
Because!palm!oil!is!a!lucrative!industry,!it!has!
establishment!and!upfront!investment!cost;!2)!poor!
attracted!many!smallholders!who!are!new!to!the!
understanding!of!good!agricultural!practices;!3)!
crop!and!have!limited!knowledge!of!proper!palm!oil!
smallholders’!lack!of!usage!of!highAquality!seedlings;!
cultivation!techniques.!One!result!of!the!many!
and!4)!dependency!on!external!processing!capacity.!!
resourceAlimited!newcomers!to!palm!cultivation!is!
a. High)upFfront)costs)for)plantation) that!their!lack!of!a!more!nuanced!understanding!of!
establishment)causes)underinvestment) oil!palm!agronomics!and!optimum!production!
in)future)farm)productivity) systems!results!in!lessAthan!optimum!results.!
Underinvestment!in!Indonesia’s!smallholder!palm!oil! As!with!any!other!crops,!the!optimal!usage!of!
industry!is!driven!by!the!high!cost!of!plantation! agronomic!inputs!such!as!fertilizers!and!pesticides!is!
establishment.!This!includes!costs!such!as!clearing! critical!to!developing!the!most!efficient!economic!
land!without!the!use!of!fire,!and!in!learning!about! and!biological!potentials!of!oil!palm!plantations!
and!investing!in!BMPs,!including!maintaining!legume! (Indonesian!Palm!Oil!Smallholders!Union!(SPKS),!
cover!crops!to!prevent!weed!growth!and!soil! 2013).!Without!fully!understanding!the!importance!
management!to!promote!optimum!oil!palm!growth.! of!these!inputs,!the!means!of!monitoring!their!use,!
the!best!application!methods,!and!other!associated!
With!limited!funds!and!a!lack!of!access!to! tasks!related!to!stewardship!and!good!business!
knowledge!of!BMPs!and!appropriate!technologies! practices,!many!smallholder!farmers!are!unable!to!
(AT),!many!farmers!are!unable!to!implement!best! fully!capitalize!in!their!investments.!!
practices.!!The!access!to!technology!and!information!
represents!a!minor!disjunction,!considering!that! For!example,!many!farmers!may!use!less!of!and/or!
farmers!have!already!invested!in!the!high!cost!of! the!wrong!formulations!of!fertilizer!in!the!crucial!
necessary!land!clearing!and!seedling!purchases.!Yet! first!few!years!of!oil!palm!development.!!This!has!
without!knowledge!of!BMPs!and!AT!management! been!shown!to!have!carryAon!effects,!leading!to!low!
opportunities,!farmers!are!likely!setting!themselves! yields!through!the!tree’s!lifetime!(Orrell!2015).!!
7!|!P a g e !
!Conversely,!using!optimum!fertilizer!formulations,! producing!that!CPO!yields!are!low!because!the!seeds!
volumes,!and!appropriate!application!methods!and! were!lowAquality!nonAhybrid!varieties!(IFC,!2013).!
timing!could!increase!production!by!1.5!tons!of!
The!lack!of!usage!of!highAquality!hybrid!seedlings!
FFB/ha,!an!increase!of!nearly!150!percent!(IFC,!
remains!a!major!issue!among!smallholders!in!
2013).!Palm!farmers,!like!other!adaptors!of!
Indonesia.!Studies!show!that!at!least!20!percent!of!
innovations,!are!heavily!weighted!towards!lateA
independent!smallholder!farmers!are!not!using!the!
adapting,!riskAaverse!groups.!!Studies!have!shown!
highAyield!hybrid!seeds!(IFC,!2013);!some!studies!
that!smallholder!plantations!do!not!catch!up!to!
show!higher!use!of!inferior!openApollinated!
good!practice!scenarios!on!average!until!year!16,!
seedlings!with!estimates!that!up!to!60!percent!of!
after!most!of!the!productive!phase!in!a!oil!palm’s!
smallholder!farms!are!contaminated!with!nonA
life!cycle!has!passed!(IFC,!2013).!
hybrid!seeds!(Arif,!2014).!The!reasons!cited!for!this!
Farmers!overall!tend!to!be!riskAaverse!and!resistant! nonAusage!of!superior!germplasm!of!lack!of!
to!innovations!as!their!overall!wealth!and!access!to! transparency!from!seed!suppliers!who!falsify!seed!
capital!lessens!(Rogers!2003).!!Palm!smallholders!are! sources,!and!general!limited!access!to!a!certified!
also!likely!to!be!risk!averse!because!of!a!lack!of! seedling!supply.!!
sound,!comprehensive!information,!and!because!of!
Because!mill!gate!prices!paid!for!FFB!are!calculated!
the!lack!the!financial!means!and!access!to!credit!to!
based!on!weight!and!quality!of!fresh!fruit!bunches,!
purchase!the!agronomic!inputs!necessary!to!
mills!will!typically!penalize!fruit!of!the!low!CPO!yield!
maximize!FFB!production.!These!financial!and!
varieties!by!discounting!prices!from!the!
agronomic!understanding!gaps!hurt!smallholder!FFB!
governmentAmandated!base!price!paid!to!farmers!
productivity!and!CPO!yield.!
for!these!fruits.!Traders!reflect!these!discounts!into!
c. Lack)of)usage)of)highFquality) the!farm!gate!prices!paid!to!farmers.!This!limits!
seedlings)leads)to)low)quality)and) farmer!revenue!and!income,!and!lessens!farmer!
ability!to!reinvest!in!their!farms.!!
yield)of)CPO))
HighAquality!hybrid!seeds!are!one!of!the!biggest!upA d. Dependency)on)external)processing)
front,!carriedAover!costs!for!smallholders!when! capacity)develops)unfair)relationships)
establishing!a!plantation.!!Moreover,!they!are!an! within)the)supply)chain)
investment!that!directly!impacts!future!fruit!
Another!issue!that!complicates!preserving!CPO!
productivity!and!CPO!quality!and!yield!more!
quality!and!yield!is!that!palm!oil!fruits!are!highly!
dramatically!than!any!other!single!factor!(Orrell!
perishable.!Ideally,!the!FFB!must!be!processed!at!a!
2015).!!
mill!within!24A48!hours!of!harvest!before!it!overA
Oil!palm!fruits!are!classified!into!in!two!or!more!subA ripens.!Overripe!FFBs!build!up!free!fatty!acids!that!
species.!!In!breeding!programs,!the!varieties,!Dura! reduce!the!quality!of!the!processed!CPO.!
and!Pisifera!are!the!two!most!important!types.!!The!
Immediate!processing!needs!raise!supply!chain!
recommended!planting!germplasm,!produced!in!a!
challenges,!especially!in!underdeveloped!palm!oil!
number!of!plant!breeding!programs,!is!a!hybrid!of!
production!areas!such!as!the!Riau,!Kalimantan,!
the!two!varieties!generically!referred!to!as!Tenera,!
Jambi,!and!West!and!South!Sumatera!regions!
which!produces!largerAfleshed!fruit!with!a!resulting!
(Indonesian!Palm!Oil!Smallholders!Union!(SPKS),!
higher!CPO!oil!yields.!Many!farmers!are!unable!to!
2013),!where!there!is!often!supply!asymmetry!
access!or!pay!for!highAquality#Tenera!seedlings!from!
between!fruit!production!volume!and!nearby!
certified!nurseries,!research!institutes,!and!oil!palm!
processing!capacity.!Generally,!a!farm!must!be!
plantation!companies!that!supply!quality!seeds,!
within!50!kilometers!in!order!to!reach!a!mill!in!time!
substituting!openApollinated!seedlings!of!unknown!
for!processing,!but!smallholder!farmers!in!more!
provenance!(IFC,!2013).!IFC!found!that!78!percent!of!
remote!areas!must!ship!FFB!up!to!100!km!to!reach!
smallholders!are!unaware!of!the!origin!of!their!
the!nearest!mill.!!
seeds!(IFC,!2013).!Often,!a!farmer!will!believe!he!is!
paying!for!a!hybrid!seedling,!only!to!find!out!a!few! Poor!road!infrastructures!and!long!lines!at!the!mill!
years!later!once!the!oil!palm!tree!has!started! gates!can!cause!further!delays!in!fruit!delivery.!
8!|!P a g e !
!According!to!the!IFC,!30!percent!of!all!smallholders’! plantations!often!control!land!distribution!to!the!
FFB!take!8!hours!or!more!to!reach!a!mill!in!the!wet! smallholders.!Land!ownership!sometimes!remains!
season!(International!Finance!Corporation,!2013).! inconclusively!defined,!without!contracts!and!titles,!
so!farmers!are!not!incentivized!to!invest!in!the!longA
This!is!an!issue!for!one!in!three!smallholders,!
term!productivity!of!the!land.!
especially!independent!smallholders!who!do!not!
have!connections!to!mills!(IFC,!2013).!Independent! The!result!of!these!issues!shows!in!the!sharp!
smallholders!are!typically!dependent!on!traders!to! difference!between!smallholder!farmers’!yields!and!
buy!their!FFB!and!deliver!it!to!a!mill!before!the!fruit! the!potential!productivity!of!a!farm!under!the!full!
overAripens.!There!are!normally!limited!number!of! expression!of!good!agricultural!practices.!
traders!involved!in!the!business!of!purchasing!FFB! Smallholder!farmers!with!low!levels!of!inputs!will!
from!independent!farmers,!and!traders!often! only!reap!half!of!potential!yield:!smallholders!
operate!territorially,!leading!to!a!deAfacto! currently!only!produce!a!reported!average!of!just!
monopoly.!!!Traders!thus!hold!supply!chain! 13.1!tons!of!FFB!per!hectare!cultivated,!as!compared!
information!over!farmers!desperate!to!offload!their! to!potential!yields!of!22!A!28!tons!per!hectare!under!
fruit!and!receive!immediate!payment!before! similar!site!conditions!on!corporate!estates!
spoilage!occurs!(IFC,!2013).!Smallholders!generally! (AidEnvironment,!2015).!
have!no!clear!idea!of!the!selling!price!for!their!FFB:!
As!a!result!of!the!aforementioned!conditions,!
average!prices!per!case!can!be!between!5!percent!to!
smallholder!farmers!remain!in!a!cycle!of!low!
36!percent!lower!than!the!KAindex!price!
productivity,!low!yields,!low!income,!and!low!
calculation10!!(IFC,!2013;!Maryadi,!2004).!!
investment,!which!is!further!complicated!by!the!
Additionally,!traders!generally!enjoy!negotiating! smallholders’!lack!of!negotiating!power!within!a!
strength!against!producers!because!many! complex!value!chain.!
independent!smallholders!rely!on!traders!for!input!
financing.!When!in!need!of!immediate!capital,! V.Opportunities)for)Sustainable)
smallholders!will!often!offload!their!FFB!to!these! Smallholder)Palm)Oil)Production)
traders!despite!the!sometimes!exploitatively!low!
prices!offered!by!traders,!resulting!in!low!incomes! Indonesia’s!smallholder!palm!oil!sector!invites!
that!restrict!future!investment!capability!(IFC,!2013).! productivity!improvements!that!could!transform!
landAuse!practices!and!provide!an!opportunity!to!
Asymmetric!value!chain!relationships!are!also! minimize!deforestation,!conserve!biodiversity,!and!
relevant!to!plasma!smallholders:!because!their!FFB! support!sustainable!livelihoods.!
price!will!be!discounted!to!repay!input!financing!if!
they!sell!to!a!tied!mill,!plasma!smallholders! The!Rainforest!Alliance!recognizes!three!
sometimes!engage!in!sideAselling!(referred!to!as! opportunities!to!respond!to!the!challenges!faced!by!
crop!shifted)!their!FFB!to!other!independent!mills.! smallholders:!1)!implementation!of!BMPs!and!AT;!2)!
Palm!companies!also!refer!to!leakages!–!losses!from! where!appropriate!to!the!plantation!cycle!stage!and!
theft!–!particularly!where!their!estates!border! current!germplasm,!the!renovation!of!farms!with!
smallholder!farms.!!Such!uncooperative!activity!can! hybrid!seedlings,!and!3)!the!capture!of!added!value!
strain!relationships!with!the!connected!plantation! through!processing!at!the!smallholder!level.!
companies.! Supporting!the!farmers!through!these!three!
approaches!in!combination!with!linking!them!to!
Another!asymmetry!in!the!palm!oil!smallholder! finance!will!ultimately!lead!to!productivity,!yield,!
farmer!and!mill/trader!relationship!is!that!the! and!income!improvements.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!! !
10
a. Implementing)Good)Agricultural)
!The!index,!as!stated!in!the!ministry!decree!letter,!consists!
of!several!components!–!FOB!price!of!crude!palm!oil,!tax! Practices)and)Appropriate)
costs,!marketing!costs,!transportation!costs!to!the!exporting! Technologies)
board,!conversion,!FFB!average!price,!percentage!of!selling!
volume,!processing!costs,!depreciation,!FFB!value!at! Training!smallholder!farmers!in!implementing!BMPs!
processor!weighting!scale,!administration!costs,!and!TBS! could!lead!to!a!doubling!in!FFB!productivity!
value!at!manufacturer!(Maryadi,!2004).!
9!|!P a g e !
!(AidEnvironment,!2015).!Two!key!areas!where! interested!in!solving!smallAscale!farmer!issues.!!
farmers!often!lack!agronomic!understanding!are!soil! Examples!of!this!would!be!the!development!of!
management!and!integrated!pest!management! better!harvest!methods!to!reduce!fruit!bruising,!
approaches.!! more!efficient!forwarding!methods!of!fruit!from!
plantations!to!collection!stations,!or!the!
Proper!soil!management!allows!farmers!to!refine!
development!of!lighter,!more!bearable!Personal!
their!approach!to!fertilizer!usage!and!application!to!
Protection!Equipment!(PPE)!appropriate!to!the!
ensure!that!enough!of!the!correct!formulation!of!
conditions!faced!by!palm!smallholders.!!The!
fertilizer!is!being!applied!when!fertilizer!would!be!
Rainforest!Alliance!has!numerous!examples!of!using!
most!effective.!For!smallholders,!this!often!means!
this!process!to!bring!AT!solutions!to!farmers!in!other!
applying!more!fertilizer!prior!to!the!tree’s!first!year!
crops!including!coffee,!tea,!cocoa,!and!bananas.!
of!harvest!in!order!to!reach!maximum!tree!
productivity.!For!smallholders!who!apply!too!much! Further!discussion!of!BMPs!and!AT!procedures!are!
fertilizer,!this!refined!approach!could!help!them! outlined!in!the!Sustainable!Agriculture!Network!
reduce!unnecessary!costs.!!The!use!of!nitrogenA (SAN)!and!Roundtable!on!Sustainable!Palm!Oil!
fixing!groundcovers!and!of!windArowing!palm!leaves! (RSPO)!principles!and!criteria.!
would!also!contribute!to!overall!soil!fertility!and!
moisture!conservation.! b. Implementing)germplasm)
renovation)
An!integrated!pest!management!(IPM)!approach!
could!involve!benefits!from!intercropping!of!a! Many!smallholder!farms!remain!unable!to!access!
legume!cover!crop!with!new!oil!palm!planting!in! highAquality!hybrid!seedlings!when!planting!there!
order!to!prevent!weeds!from!growing,!as!well!as!add! palm!oil!plantation!in!the!first!place!and!continue!to!
a!source!of!revenue.!This!would!reduce!the!amount! suffer!from!low!FFB!and!CPO!yields.!Renovating!
of!chemical!herbicides!or!weeding!labor!needed!to! these!farms!with!highAquality!hybrid!seedlings!in!
control!weed!overgrowth!on!oil!palm!plantations.! addition!to!implementing!BMPs!could!result!in!
Additional!use!of!IPM!involves!a!robust!field! higher!incomes!due!to!better!CPO!yields.!!
scouting!approach,!and!the!use!of!inexpensive! Most!importantly,!many!palm!oil!plantation!are!
pheromone!traps!to!both!detect!and!to!massAtrap! aging!and!are!not!renovated!in!a!timely!fashion.!
pests!such!as!rhinoceros!beetles,!thus!allowing!a! Most!smallholder!farmers!are!reluctant!to!replant!
more!judicious!and!targeted!use!of!insecticides.! palm!oil!trees!at!the!end!of!their!productive!
Once!the!oil!palm!trees!are!taller!and!more!mature,! economic!life!cycle!(Indonesian!Palm!Oil!
introducing!cattle!as!a!natural!weeding!mechanism! Smallholders!Union!(SPKS),!2013).!Often,!these!trees!
could!also!be!effective,!as!long!as!farmers!are! can!grow!to!be!taller!than!12!meters!by!year!15!
already!familiar!with!raising!cattle!and!as!long!as!the! (Bonneau,!Field!Agronomist,!2015),!by!which!point!
oil!palm!trees!are!tall!enough!that!the!cattle!are! the!fruit!is!more!difficult!to!reach!and!thus!more!
unable!to!reach!its!fronds!and!will!instead!graze!on! costly!to!harvest!(Indonesian!Palm!Oil!Smallholders!
unwanted!weeds.! Union!(SPKS),!2013).!IDH!estimates!that!around!10!
percent!of!independent!smallholders!cultivate!plots!
Additionally,!BMPs!include!better!plantation! dominated!by!overAaged!palms!that!require!entire!
clearing!processes!as!opposed!to!current!practices! replanting!of!the!plot!(Arif,!2014).!!
of!using!fire!to!destroy!forest!and!develop!peatland,!
while!plantations!already!on!peatlands!could!be! Yet!many!smallholders!continue!to!delay!replanting!
better!managed!through!a!system!of!integrated! because!of!the!high!cost!of!renovation,!as!well!as!
water!management.!! the!need!for!longAterm!financing!to!cover!the!gap!
between!replanting!and!new!oil!palm!fruit!
In!addition!to!agronomic!BMP!approaches,!a!series! production!(Arif,!2014).!As!payback!horizons!on!
of!efforts!to!improve!the!basic!effectiveness!of! renovation!can!take!8!–!13!years,!including!the!
farmers!would!benefit!from!both!learning!from! immature!phase!(IFC,!2013),!many!smallholders!who!
farmers’!own!solutions!through!the!Farmer!Field! lack!alternative!sources!of!income!are!resistant!to!
Schools!(FFS)!approach!and!through!linking!farmer! replanting!their!farms:!40!percent!of!independent!
groups!with!university!and!industry!researchers!
10!|!P a g e !
!smallholders!receive!75A100!percent!of!their! may!be!able!to!overcome!current!asymmetries!
household!income!from!oil!palm!(IFC,!2013).! between!production!and!company!mills,!reducing!
their!dependency!on!external!processing!facilities!
Implementing!BMPs!and!renovating!farms!will!allow!
and!decreasing!the!risk!of!not!being!able!to!sell!their!
smallholder!farmers!to!intensify!production!by!
FFB!to!external!mills.!!!
dramatically!improving!their!FFB!yield!and!CPO!yield!
from!a!17!percent!oil!extraction!rate!(OER)!to!20! It!is!estimated!that!smallAscale!mills!would!capture!
percent!OER.!Better!CPO!yields!would!increase!the! an!added!$200!value!per!metric!ton!of!FFB!
average!FFB!price!per!ton!from!$109!to!$122! processed!(Levin,!2012).!However,!these!are!
(AidEnvironment,!2015).!World!Growth!estimates! expensive!to!operate;!they!cost!between!$90,000!
that!smallholders!could!reach!CPO!yields!of!6A7!tons! and!$100,000!per!hourly!metric!ton!capacity!to!
of!CPO!produced!per!hectare,!which!doubles!the! build.!Construction!of!smallAscale!mills!–!as!smaller!
current!average!of!3.04!tons!CPO/ha!(World! capacity,!lower!efficiency!versions!of!the!larger!(30!
Growth,!2011).!! tons!per!hour!+)!–can!be!made!at!oneAthird!the!cost!
of!those!of!their!stateAofAtheAart!counterparts!(Table!
By!improving!their!FFB!and!CPO!yields,!smallholders!
1).!
will!be!able!to!boost!their!income!from!an!estimated!
return!of!$960/ha!for!lowAyield!independent! Independent!smallAscale!mills!already!exist!in!North!
smallholders!to!$2340/ha!for!highAyield! Sumatra,!where!they!fill!local!infrastructural!gaps!
independent!smallholders!(World!Growth,!2011)! when!large!mills!are!unavailable!(DAI,!2009).!
without!having!to!resort!to!further!expansion!of! Anecdotal!evidence!suggests!that!the!smallholders!
their!farms!through!deforestation.!AidEnvironment! in!this!area!are!–!as!a!result!of!the!additionally!
calculates!that!a!conservative!estimate!of!a!2!CPO! captured!value!from!primary!processing!–!
ton/ha!yield!increase!would!result!in!a!reduced!need! economically!much!better!off!than!plasma!
for!nearly!2!million!hectares!of!land!to!be!converted! smallholders!tied!to!mills!with!greater!control!
into!palm!oil11!(Molenaar!&!Orth,!2010)!assuming! (AidEnvironment,!2008).!
the!right!set!of!policies!were!implemented!to!
SmallholderAowned!smallAscale!mills!may!also!
encourage!intensification!rather!than!extension.!
benefit!smallholders!by!working!in!logistically!
c. Capturing)added)value)through) challenged!areas!such!as!Kalimantan,!Sulawesi,!and!
smallholder)processing) Papua!(DAI,!2009),!where!the!larger!mills’!capacity!
cannot!meet!local!FFB!production!capacity!due!to!
Lastly,!independent!smallholders!–!not!tied!to!a!mill! smaller!or!more!scattered!planting!areas,!or!local!
–!may!be!able!to!capture!value!within!the!supply!
chain!by!processing!their!own!CPO.!By!investing!in!
Table)1:!Information!on!micro!mills,!mini!mills!and!
smallholderAowned!processing!facilities,!farmers! conventional!mills!
Capacity*) Land)required**) Estimated)#)of)
(Metric!ton! (Ha!of!FFB! Smallholders* Cost)!
! CPO!output/hr)! production)! **!
Micro!mills! 1!–!5!MT!! 500!–!2500!! 100!–!500!! $90,000!–!$100,000!
Mini!mills! 5!–!20!MT!! 2500!–!6000! 500!–!1000!!!! $120,000!A!$280,000!
Conventional!mills! 30!–!60!MT!! 9,000!–!18,000!! 1000!–!2000!!! $190,000!A!$240,000!
*Source:#(DAI,!2009)#
**Source:#(Saleh,!2015).#
***Based#on#Rainforest#Alliance#assumptions.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!! ! FFB!production!cannot!access!the!mill!because!of!
11
!Based!on!estimates!of!3!million!ha!of!smallholder!land!with! distance!or!poor!infrastructure.!!
average!yield!of!3!tons!CPO/ha.!
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!Such!smallAscale!mills!are!more!common!in!West! d. Improving)access)to)smallholder)
African!palmAproducing!regions,!largely!because! financing)
smallAscale!mills!produce!lower!quality!CPO!that!is!
often!used!more!for!domestic!use!rather!than!CPO! As!highlighted!above,!supporting!smallholder!palm!
that!will!be!marketed!to!refineries!and!developed! oil!producers!with!the!implementation!of!BMPs!and!
into!derivative!products!for!export.!On!the!other! AT,!germplasm!renovation!and!processing!require!
hand,!60!percent!of!Indonesia’s!palm!oil!is!exported! the!mobilization!of!shortAterm!and!longAterm!
(USDA,!2014),!16!percent!is!used!in!the!domestic! finance!to!pay!for!the!input,!services!and!
food!industry,!and!12!percent!is!used!in!biodiesel! infrastructures!implied!by!such!activities.!!
production!(USDA,!2015).!By!the!year!2020,!23! While!there!are!some!financing!options!available!to!
million!of!the!projected!30!million!tons!of!palm!oil! independent!smallholders,!smallholders!who!are!not!
produced!by!Indonesia!will!be!exported!(World! tied!to!company!plantations!rarely!have!adequate!
Growth,!2011).! access!to!financing!for!inputs,!plantation!
Common!challenges!that!smallAscale!mills!need!to! establishment!or!replantation.!In!a!survey,!the!IFC!
overcome!include!those!posed!by!inefficient! found!that!only!16!percent!of!independent!
economies!of!scale!and!the!lack!of!the!technological! smallholders!received!loans!for!plantation!
inputs!necessary!to!properly!store,!purify,!and!filter! development!(IFC,!2013).!Sources!of!financing!for!
the!processed!CPO!to!be!sold!to!local! independent!smallholders!included!banks!(60!
intermediaries,!processors,!and!exporters.!Unless!an! percent),!credit!unions!(13!percent),!and!
area!proposed!for!a!miniAmill!area!lacks!sufficient! cooperatives!(9!percent)!(IFC,!2013).!!
postAprocessing!bulking!and!shipping!infrastructure,! Independent!smallholders!are!generally!unable!to!
it!is!difficult!to!integrate!a!smallAscale!mill!into!the! work!with!formal!financial!institutions!to!receive!
existing!supply!chain.!It!is!important!to!understand! credit;!their!financing!requirements!are!often!too!
that!the!development!of!smallholderAowned!mills! small!for!banks!and!too!big!for!microfinance!
without!downstream!capacity!for!bulking!stations! organizations.!Often,!smallholders!are!not!
and!shipping!terminals!poses!a!risk!of!shifting!the! considered!as!“credit!worthy”;!they!lack!credit!
negotiating!position!from!smallholder!producers! history!or!“hard!value”!collateral,!such!as!a!land!
and!traders!to!smallholders!and!larger!mills,!as!the! certificate!(IFC,!2013).!Additionally,!farmers!present!
smallAscale!mill!would!need!to!sell!its!output!for! high!repayment!and!default!risks.!For!example!
consolidation,!rather!than!directly!to!manufacturers! without!proper!farm!management!practices!in!
and!exporters.! place,!it!can!take!smallholders!much!longer!than!the!
Introducing!smallAscale!processing!to!Indonesia!is! expected!5A10!years!to!pay!back!a!plantation!
still!a!relatively!new!idea,!but!there!have!been!a!few! establishment!loan!(IFC,!2013).!
examples!of!successful!mills!where!smallholders! ShortAterm!onAfarm!financing!needed!by!
were!shareholders,!which!strengthened!their! smallholders!may!include!fertilizers,!labor!costs!for!
bargaining!position!(Hanu,!2015).!SPKS,!a! maintenance!or!harvesting!or!FFB!transportation!
smallholders’!union!operating!across!Indonesia,!has! costs!(IFC,!2013).!MidAterm!and!longAterm!
also!presented!to!financial!institutions!on!the! investments!may!include!investments!in!land!
possibility!of!organizing!smallholders!and!financing! ownership!certificates!that!could!be!used!as!
investment!of!a!mill,!which!was!received!well!(Saleh,! collateral!in!the!future,!rehabilitation,!and!
2015).!! renovation!of!farms!(IFC,!2013)!or!processing!
Other!possibilities!to!consider!further!developing! infrastructures!and!activities.!!
include!smallAscale!biofuel!processing!and!cost! Without!access!to!finance,!smallholders!often!have!
savings!(DAI,!2009),!or!further!capturing!value! difficulties!sourcing!the!right!seedlings!and!inputs!
through!vertical!integration!of!a!smallholderAowned! needed!to!for!oil!palm!cultivation.!While!they!may!
seedling!nursery!(Saleh,!2015).!! obtain!subsidized!seedlings!and!fertilizer!from!the!
government!and!local!authorities,!these!subsidies!
are!often!limited!by!quotas,!forcing!smallholders!to!
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!deal!with!the!difficulty!of!sourcing!their!own! 1. “Best!Management!Practices”!(BMPs)!scenario!
certified!quality!seedlings.!Without!initial! reflecting!highest!sustainability!standards!and!
investment!capital,!farmers!may!choose!to!purchase! 2. !“Low!Input”!scenario!reflecting!poor!agronomic!
cheaper!seedlings!that!dampen!their!farm’s! practices!with!limited!input!usage!(see!tables!
productivity!for!the!entire!25Ayear!life!cycle!(IFC,! below).!
2013).! !
Similarly,!smallholders!who!are!unable!to!access! INPUT)USAGE)
fertilizer!through!subsidies!must!instead!purchase!
BMPs)Scenario)) LowPInput)Scenario)
fertilizer!from!middlemen!in!a!long!distribution!
chain!that!often!inflates!original!fertilizer!prices!(IFC,! Seedlings)
2013).!For!this!reason,!after!plantation! High!quality!hybrid! NonAhybrid!seed!used!
establishment,!fertilizers!become!one!of!the!biggest! seed!used!
operational!costs!in!oil!palm!cultivation,!averaging!
about!74!percent!of!field!costs!(IFC,!2013).!! Fertilizer)
Promoting!access!to!financing!for!smallholder!palm! Fertilizer!applied!at! No!fertilizer!applied!
oil!producers!is!critical!to!unlocking!smallholders’! recommended!rates!
access!to!quality!seedling!and!inputs!and!to!support! and!times!
sustainable!palm!oil!production.!Organized!groups! Pest)and)disease)control)
would!also!benefit!from!access!to!financing!to!help!
Pests,!particularly!rats,! No!effort!to!control!
smallholders!better!manage!their!production!as!well!
and!diseases!controlled! pests!or!diseases!
as!potentially!invest!in!processing!facilities!and!
support!postAharvest!shipping.!! Herbicides)
VI. Cost)Structure)Analysis) No!herbicide!used;!rely! Some!herbicide!used!
on!LCC!and!weeding!
Providing!smallholders!with!technical!assistance!in! instead!
combination!with!financing!for!BMPs!
!
implementation,!renovation!and/or!smallholder!
processing!are!avenues!to!bridge!the!lack!of! AGRONOMIC)PRACTICES)
knowledge!and!finance!that!causes!a!significant!
BMPs)Scenario) LowPInput)Scenario)
yield!gap!on!most!smallholder!farms.!Such!an!
approach!would!not!only!benefit!farmers,!but!also! Correct!seed!planting!
contribute!to!achieving!greater!sustainability!in! Palms!planted!at! Poor!palm!planting!
palm!oil.! correct!age!and!to! standards,!severe!
To!determine!current!financing!needs,!the! correct!depth! transplanting!shock!and!
Rainforest!Alliance!conducted!a!preliminary!deskA delayed!growth!
based!analysis!of!the!costs!involved!with! Plant!consolidation!
implementing!and!maintaining!a!smallholder!oil!
palm!plantation;!based!on!cost!information!received! Plants!are!consolidated! Poor!palm!planting!
from!SPKS!and!CIFOR.!! to!permit!rapid!root! standards,!severe!
growth! transplanting!shock!and!
The!Rainforest!Alliance!identified!two!scenarios12!to! delayed!growth!
describe!a!smallholder’s!costs!depending!on!the!
Weeding!
practices!implemented!and!the!level!of!inputs!
applied!(Molenaar!&!Orth,!2010):!! InterArow!vegetation! Little!attempt!to!control!
controlled!and!LCC! weeds!in!immature!
encouraged.!Palm! areas.!No!effort!made!to!
circles!completely! clear!circles.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!! !
12
cleared!of!weeds!!
!Based!on!AidEnvironment!report!(Molenaar!&!Orth,!2010)!
and!RA!assumptions! Pruning!
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